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Simplification Can Lead to Increased Savings

January 24, 2014

By Jenny Li Fowler, HKS Communications

Financial decisions are not easy, and their complexity can often lead to procrastination. Brigitte Madrian, Aetna Professor of Public Policy and Corporate Management, takes a look at the role of complexity as a deterrent to financial decision making, specifically, savings plan enrollment.
In her new working paper, “Simplification and Saving,” Madrian and her coauthors evaluate what happens when you take a multidimensional decision and collapse it into a straightforward choice between the status quo and a simple pre-selected alternative.
“We find that giving employees a simple form with a check box to initiate either savings plan enrollment or a savings plan contribution increase leads to sizable changes in savings plan enrollment for employees not enrolled in the savings plan, and in contribution rates for employees participating in the plan but contributing less than the maximum amount matched by their employer,” says Madrian. In fact, it led to a 10-20 percentage point increase in plan enrollment rates.
“Furthermore, the intervention is extremely low cost — the cost of printing and mailing a form,” says Madrian. “A simple form that gives employees a pre-selected savings option (save X percent of pay invested in the XYZ fund), and an easy way to implement that choice (check the box and mail it in using a postage paid form), can lead to sizable changes in behavior.”
“Moreover, we find that repeating the intervention leads to continued change, so that the cumulative effects over time can be quite large,” Madrian concludes.
Madrian’s call to action for policymakers is to simplify. “Our research suggests that the complexity of government programs — tax collection, social welfare programs, voter registration — can lead individuals to procrastinate. Simplifying things will increase compliance.”
The paper, which is published in the Journal of Economic Behavior and Organization,is co-authored by John Beshears, Harvard Business School; James J. Choi, Yale School of Management; and David Laibson, Harvard University. Brigitte Madrian is the Aetna Professor of Public Policy and Corporate Management. Madrian’s current research focuses on household saving and investment behavior. Her work in this area has impacted the design of employer-sponsored savings plans in the U.S. and has influenced pension reform legislation both in the U.S. and abroad. She has also examined the impact of health insurance on the job choice, retirement decisions of employees, and the hiring decisions of firms.